If you miss a filing or payment deadline under Making Tax Digital (MTD), penalties can apply quickly — and HMRC doesn’t offer much leniency.
Under the new points-based system, each late submission earns a penalty point. Reach the threshold, and those points turn into real fines. For VAT, that threshold is four points. For Income Tax Self Assessment (ITSA), it’s only two.
- Miss one VAT return? You’re issued a penalty point.
- Miss four? You’ll face a £200 fine for every additional late submission.
- For ITSA, just two late returns will land you with that same penalty.
Late payments are even more unforgiving. Interest starts immediately, and the longer you delay, the more you owe. Let’s explore exactly how the MTD penalty system works, and more importantly, how to stay on the right side of it.
The MTD Penalty System Explained
HMRC’s updated system targets repeat non-compliance, not the occasional slip. Here’s how it works:
One point per late submission: Every time you miss a return deadline, you earn a penalty point.
Thresholds for fines:
- VAT: Fined after 4 points
- MTD for ITSA: Fined after 2 points
- Penalties: Once the threshold is met, you’re fined £200 for every subsequent late submission.
Point expiry: Stay compliant, and your points expire after 12 months (VAT) or 24 months (ITSA).
Why Do MTD Penalties Happen?
Penalties don’t require major errors, small oversights are often enough.
Here’s what can trigger them:
Late submissions: Missing a return deadline, even with no tax due, still earns a penalty point.
Late payments: Paying after the due date results in interest charges, and further penalties if you’re 16+ days late. HMRC link
Non-compliant software: Filing manually or using outdated tools counts as a breach.
Poor digital record-keeping: HMRC expects accurate, up-to-date digital records. Gaps could mean penalties if you’re audited.
Whether it’s MTD for VAT or MTD for Income Tax, the rules apply equally.
How Much Could MTD Penalties Cost You?
Let’s look at the real numbers, without the jargon.
£200 flat fine: Applied after you hit your points threshold.
Late payment penalties:
- 1–15 days late: Interest only (approx. 3%)
- 16–30 days late: 6% of unpaid tax added as a fine
- 31+ days late: Additional 10%, plus ongoing interest
If you continue to miss deadlines, the £200 fine repeats for each new offence, whether for VAT or ITSA.
VAT vs Income Tax: Penalty Differences
Here’s how MTD penalties differ for VAT and Income Tax Self Assessment:
| Feature | VAT (MTD) | Income Tax (MTD for ITSA) |
|---|---|---|
| Filing frequency | Quarterly | Annual (moving to quarterly 2026) |
| Penalty threshold | 4 points | 2 points |
| Points expiry | 12 months | 24 months |
| Fine after threshold | £200 per late return | £200 per late return |
| Compliance deadline | Already mandatory | Expands from April 2026 |
This matters if you’re preparing for Making Tax Digital penalties in 2026, when more sole traders and landlords will be included under ITSA.
How to Avoid MTD Penalties
Avoiding fines is easier than you might think, but it takes consistency and digital compliance.
Here’s how to stay on the safe side:
Use HMRC-recognised MTD software: Manual spreadsheets aren’t compliant. Choose software that connects directly to HMRC.
Set deadline reminders: MTD dates don’t move. Automate alerts to stay on schedule.
File even if you owe nothing: Submitting a “zero return” is still mandatory, missing it still earns a point.
Keep records digitally: HMRC expects digital storage, not paper files. Good records protect you in case of an audit.
Start early for the 2026 rollout: If you’ll be included under MTD for ITSA, begin preparations now.
Need help? The team at Accounting People works with accountants who understand MTD inside and out. We can help ensure your records stay clean and compliant.
Can You Appeal an MTD Penalty?
Yes, but you’ll need a valid reason and a fast response.
To appeal:
Log into your HMRC Government Gateway account
Navigate to your VAT or ITSA penalty section
Submit your appeal within 30 days of receiving the notice
Clearly explain your situation and attach supporting evidence (e.g. doctor’s note, error screenshots)
Valid reasons include:
- Serious illness
- Bereavement
- Software or system failure
- HMRC error
Even if you successfully appeal, you’re still expected to comply in future. One successful appeal won’t protect you from penalties next time.
Quarterly Reporting and 2026 Penalty Changes
From April 2026, quarterly reporting under MTD for ITSA becomes mandatory for many more individuals. If you’re not prepared, you could face:
- Software compatibility issues
- Missed deadlines
- Fast-building fines
Stay up to date with our Making Tax Digital timeline blog to ensure you’re ready well in advance.
Stay Compliant with Accounting People
At Accounting People ltd, we support creative businesses and freelancers through the digital tax transition. Our partner accountants:
- Ensure MTD-compliant record-keeping
- Help you avoid fines
- Simplify the tax process
- Provide peace of mind
Don’t wait for the penalty letter. Book a free consultation and let’s make your tax digital, without the stress.
